Bruce’s Metal Market Commentary – February 2019
The old adage in elections and politics is: “It’s the economy, stupid.” Today the adage is: “Look at the economy and don’t listen to politics.” Granted, it is hard not to listen to the tweets and barrage of talk these days, but this is a metal commentary.
I still like what I see about our economy. Industrial production and factory production were up 1.1% in January. Capacity utilization is also up to 78.7%, the highest since January 2015. ISM manufacturing was up 2.3 percentage points from December, to 56.6%. Payrolls were very strong and wage gains were not inflationary, plus there was strength in rotary rigs, capital goods and nonresidential construction. Residential housing construction and car sales were flat.
All this transpired while we had the longest ever government shutdown and trade talk uncertainties. On the other side, consumer confidence dropped to 90.7, the lowest since Trump was elected. The NFIB small business confidence level also slumped to a two-year low. Business owners expecting improvement over the next 6 months fell to 6%, down from a post-election peak of 50%. Despite this, the proportion of businesses planning a capital expenditure in the next 3 to 6 months went up.
While business continues to look good in the US, the rest of the world is looking weaker. Growth throughout the Eurozone, UK and Asia is softer than in the US. The Chinese Caixin Manufacturing PMI dropped again to its lowest level in 3 years and is in the retraction stage. New orders also dropped to the lowest levels since September 2015. More talks about improving infrastructure are taking place. China is very important to the metals business because it represents 50% to 60% of the global nonferrous metals demand. I am attaching an excellent short analysis of the Chinese economy and strategy from the January 6 Financial Times. It gives insight into China’s economy, politics and perspective on the trade talks.
Nonferrous metal prices rebounded slightly for the first time in 10 months. The big news for prime aluminum is that the official Rusal aluminum sanctions were lifted. This was anticipated and had little impact on the prime market and the scrap values. The scrap aluminum scenario is still the same, with consumers staying busy with more scrap than they can use. Most prime aluminum grades were up this month. For the first time in 10 months, aero chips went up 1 cent. The last time chips were so low was Q1 2009, which was the bottom of the Great Recession. Copper and nickel were also up slightly and stainless steel prices were close to January prices.
Scrap steel prices dropped from $10 to $20 per ton. Meanwhile, hot rolled coil has dropped again to the $680 per net ton level. The other complication for the steel market is the Brazilian mining company Vale, which suffered a break in a dam used in iron ore mining. Many people were killed in the flooding and the mine has been shut down. Other steel mines have also shuttered. Iron ore prices are now near a two-year high.
“We cannot direct the wind, but we can adjust our sails.” -Unknown
Work Safe. Work smart. Profits will follow.